Capital Gains Taxation
Capital gains are profits from selling investments like stocks, bonds, real estate, or businesses. Tax treatment depends on holding period: short-term gains (held under 1 year) are taxed as ordinary income at your marginal rate (10-37%). Long-term gains (held over 1 year) receive preferential rates: 0% for low earners, 15% for most people, 20% for high earners ($492,000+ single, $553,000+ married in 2024).
The difference is substantial. A $25,000 gain on a stock held 11 months is taxed at 24% ($6,000 tax) if you're in that bracket. Holding just one more month qualifies for long-term treatment at 15% ($3,750 tax), saving $2,250. This is why tax-loss harvesting and strategic timing of sales can significantly reduce tax liability.
Capital losses offset gains dollar-for-dollar. If you have $30,000 in gains and $10,000 in losses, you only pay tax on $20,000 net gain. You can deduct up to $3,000 of net losses against ordinary income annually, with remaining losses carrying forward indefinitely. This makes strategic loss harvesting valuable, especially in down markets - sell losers to offset winners or create deductions.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
Hold over 1 year for lower rates, invest in tax-advantaged accounts (IRA/401k - no tax until withdrawal, Roth - never taxed), offset gains with losses, or donate appreciated securities to charity (deduct full value, never pay tax on gain).
No. IRAs and 401(k)s don't trigger capital gains when you sell investments within the account. You pay income tax on traditional account withdrawals (not capital gains rates). Roth account withdrawals in retirement are completely tax-free.
Short-term (under 1 year holding) is taxed as ordinary income at 10-37%. Long-term (over 1 year) gets preferential rates of 0%, 15%, or 20%. Holding just over a year can save 10-17 percentage points in taxes.
Original purchase price plus commissions/fees. If you bought at different times, use specific identification or FIFO (first in, first out). Inherited assets get 'stepped-up basis' to value at death - huge tax advantage.
Most states tax capital gains as ordinary income. Nine states (AK, FL, NV, NH, SD, TN, TX, WA, WY) have no income tax, so no capital gains tax. This can save 3-13% on top of federal tax.